The Future of the World economy

I keep seeing articles reapearing about subjects such as this, and it has brought me to wonder, what will happen when the U.S. falls from it's position of top economic power?

(Original post by news)
U.S. living beyond means, Dodge warns
Last Updated Mon, 30 May 2005 1323 EDT
CBC News
OTTAWA - Bank of Canada governor David Dodge offered a bankerly rebuke to the United States on Monday for its borrow-and-spendthrift ways, which he suggested are a threat to world economic stability.

Less directly, he chided nations such as China for rigging their currencies to boost exports while building up larger and larger foreign-exchange reserves, creating a lopsided world in which Asian savings finance U.S. spending.

David Dodge: 'A country's external indebtedness cannot keep growing indefinitely' (CP file photo)
In the text of a speech to be given at a Montreal conference, the central bank chief warned of "large, global economic imbalances that have become the subject of increasing concern" to policy-makers.

"I am referring, of course, to the persistent and growing current account deficit in the United States that is mirrored by large current account surpluses elsewhere, especially in Asia."

Trade imbalance problems highlighted

His comments echo those of many economists who have watched the United States evolve from the world's greatest creditor nation to the greatest debtor as Americans saved less, consumed more and imported more. China, meanwhile, took over much of the world's consumer-goods manufacturing and used its export earnings to soak up vast amounts of U.S. debt.

Supporters of the Bush administration have tended to argue that the three U.S. deficits — in international trade, current account and federal budget — do not matter to a superpower that prints the world's most widely used money.

Dodge said the imbalances won't go on forever.

"At some point, they will have to be resolved. Why? For one thing, a country's external indebtedness cannot keep growing indefinitely as a share of its GDP. Eventually, investors will begin to balk at increasing their exposure to that country, even if it is a reserve-currency country, such as the United States.

"For another thing, the buildup of foreign exchange reserves by Asian countries will, eventually, feed into domestic monetary expansion and lead to higher inflation. These imbalances will ultimately be resolved, either in an orderly, or in an abrupt, disorderly way."

A basic problem is the mismatch in national rates of saving, Dodge said.

"Specifically, over the past decade or so, we have seen many countries outside the United States increase their saving by a very large amount, while at the same time, the United States has reduced its saving and has become increasingly reliant on foreign borrowing."

He said Asian countries built up foreign-exchange reserves partly as a cushion against a recurrence of the region's 1997-98 economic crisis.

"But more importantly, policies to encourage export-led growth in many Asian economies have exacerbated the situation. Some countries have actively tried to prevent an appreciation of their currencies by intervening in the foreign exchange market. In doing so, not only are they increasing the imbalances, they are also seen by some to be securing an unfair trade advantage and shifting the burden of global adjustment onto others."

Reports from China last week said there was no sign Beijing would speed up plans to revalue the country's currency, which is widely considered artificially cheap. Such a move would make Chinese goods less competitive in international markets and shrink the value of China's huge official holdings of U.S. government securities.

On Monday, Beijing reacted sharply to U.S. and European moves to restrict imports of Chinese clothing and textiles, which have flooded into western markets since a quota system expired in January. China cancelled plans to increase export taxes on many garments as a voluntary move to handicap its own producers, the Associated Press reported.

(Original post by canuck)
I keep seeing articles reapearing about subjects such as this, and it has brought me to wonder, what will happen when the U.S. falls from it's position of top economic power?

I agree with the other post about economists agreeing to disagree on just about everything.

I have seen similar articles before. Replace the word "China" with "Japan" and this could have been written 15-20 years ago. Japan's GDP was growing at an average rate of 10% in the 1960s, 5% in the 1970s, and 4% in the 1980s. In the '90s, it dropped to about 1.7% and it is only starting to recover this year. It turned out that all predictions economists were making about Japan becoming an unstoppable economic juggernaut were wrong.

(Original post by Made in the USA)
I agree with the other post about economists agreeing to disagree on just about everything.

I have seen similar articles before. Replace the word "China" with "Japan" and this could have been written 15-20 years ago. Japan's GDP was growing at an average rate of 10% in the 1960s, 5% in the 1970s, and 4% in the 1980s. In the '90s, it dropped to about 1.7% and it is only starting to recover this year. It turned out that all predictions economists were making about Japan becoming an unstoppable economic juggernaut were wrong.

Ahh again you only give part of the story. The Japanese were given a choice to persue economic growth or improving socail programs, they chose social programs (1970's?)

Also, Japan ia a democracy, China isnt. China can continue to persue economic growth with or without the people approval.

You kinda need to provide proof on the growth figures. Last year, the Japanese economy didnt grow at all I think.

(Original post by Bismarck)
What are you talking about? The Japanese growth slowed down in the '70s for the same reason it slowed down in Europe and the US: the skyrocketing price of oil.

Yes, that is obvious, but China does not have the social programs China has now. Those social programs were created due to the demand of the people. You could also argue that Japanese cars became popular on the American market due to their fuel efficiency, increasing export growth (sorta what we are seeing now, but oil demand still remains a problem.)

China has 10x the population of Japan, and easily 15x the land mass.
China has a communist goverment that uses capitalist policies.
China's social programs are far lower than that offered by Japan.

(Original post by Bismarck)
Around half of China's GDP is spent by the government (the percentage for Japan is closer to 40%), which suggests that China has a larger safety net given its level of development than does Japan.

As you might know already, you must back your statement by figures (charts, links, ect.)

People in Japan enjoy higher living standards than those who live in China. That is a fact.

(Original post by Bismarck)
I do hope you realize that Keynesianism has long been discredited as an economics ideology, partially due to the consequences of the oil crisis mentioned above.

The ICU isn't Keynesian ideology, it's just something Keynes proposed. If you wanted to discredit it, you would have to do so yourself, you can't simply dismiss an idea by saying that Keynes' theories are discredited.

(Original post by Tomorrow2Day)
The ICU isn't Keynesian ideology, it's just something Keynes proposed. If you wanted to discredit it, you would have to do so yourself, you can't simply dismiss an idea by saying that Keynes' theories are discredited.

The ICU would be an extreme version of the Bretton Woods system that collapsed in '73. The fact is that this system removes the ability to change monetary policy by each country. Given the fact that monetary policy is the most efficient and most used method of decreasing the severity of recessions and decreasing the volatility of the business cycle in general, getting rid of it would have devastating consequences on the world economy (which is what led to America going off the gold standard in '71).

And which part of Keynesianism do you want me to discredit? The part about firms not attempting to maximize profits? The supposed liquidity preference during recessions? That deficits supposedly don't matter? That the government is supposedly more efficient than private firms?

(Original post by canuck)
People in Japan enjoy higher living standards than those who live in China. That is a fact.

No kidding. The average income in Japan is 8 times higher than in China. That doesn't mean that the Chinese government spends less on the safety net as percentage of GDP than Japan. Your original statement was that China can surpass Japan because it has a smaller safety net. Well the fact is that if spending for that net as percentage of GDP doesn't decrease, China will have a larger safety net than Japan.

(Original post by Bismarck)
The ICU would be an extreme version of the Bretton Woods system that collapsed in '73. The fact is that this system removes the ability to change monetary policy by each country. Given the fact that monetary policy is the most efficient and most used method of decreasing the severity of recessions and decreasing the volatility of the business cycle in general, getting rid of it would have devastating consequences on the world economy (which is what led to America going off the gold standard in '71).

How does the ICU remove the ability to change national monetary policy? Surely the currencies are fixed only against the bancor (or whatever) and not against each other? In short, trade continues more or less as normal. Again this is one where I'll gladly admit to not knowing all the details but to me it seems that the ICU's incentives to trade would be far more beneficial to developing economies and eventually to us all than the current system of dollar democracy.

(Original post by Tomorrow2Day)
How does the ICU remove the ability to change national monetary policy? Surely the currencies are fixed only against the bancor (or whatever) and not against each other? In short, trade continues more or less as normal. Again this is one where I'll gladly admit to not knowing all the details but to me it seems that the ICU's incentives to trade would be far more beneficial to developing economies and eventually to us all than the current system of dollar democracy.

You can't change the amount of money in the economy if your currency is pegged to anything. And last time I checked, the amount of international trade since the collapse of the gold standard has greatly increased.